Some Insights Into PMLA

The Prevention of Money Laundering Act, 2002 (“PMLA” for short) was enacted as a comprehensive legislation, inter alia, --

• for preventing the laundering of the proceeds of serious crimes,
• to provide for confiscation of property derived from or involved in money laundering,
• for setting up of agencies and mechanisms for coordinating measures for combating money laundering, and
• for matters incidental thereto.

Even though the PMLA received the assent of the President of India on 17-01-2003 and was published on 20-01-2003, it was brought into force only on 01-07-2005.

2. “Money laundering” involves the disguising of financial assets to be used without detection of the “illegal activity” which produced those assets. It is an act of processing of the illegally acquired funds through a legitimate business or through a foreign bank in order to make them appear respectable or lawful. A close scrutiny of the definition of “money laundering” shows that “proceeds of crime” is a necessary ingredient for attracting the offence of “money laundering” as defined under Section 3 of PMLA which reads as follows—

“3: Offence of money-laundering - Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering”.

Explanation – For the removal of doubts, it is hereby clarified that, – (i) a person shall be guilty of offence of money-laundering if such persons is found to have directly or indirectly attempted to indulge or knowingly assisted or knowingly is a party or is actually involved in one or more of the following processes or activities connected with proceeds of crime, namely:-

a) Concealment; or

b) Possession; or

c) Acquisition; or

d) Use; or

e) Projecting as untainted property; or

f) Claiming as untainted property,

In any manner whatsoever;

(ii) the process or activity connected with proceeds of crime is a continuing activity and continues till such time a person is directly or indirectly enjoying the proceeds of crime by its concealment or possession or acquisition or use or projecting it as untainted property or claiming it as untainted property in any manner whatsoever.”

Section 4 of PMLA which provides for the punishment for “money laundering” reads as follows –

“4: Punishment for money-laundering - Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine.

Provided that where the proceeds of crime involved in money-laundering relate to any offence specified under paragraph 2 of Part A of the Schedule, the provisions of this section shall have effect as if for the words "which may extend to seven years", the words "which may extend to ten years" had been substituted”.

Section 2(u) of PMLA defines the expression “proceeds of crime” as follows –

“Proceeds of crime” means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property or where such property is taken or held outside the country, then the property equivalent in value held within the country or abroad.

Explanation – For the removal of doubts, it is hereby clarified that “proceeds of crime” include property not only derived or obtained from the scheduled offence but also any property which may directly or indirectly be derived or obtained as a result of any criminal activity relatable to the scheduled offence.”

3. Thus, “property” in the form of cash or otherwise earned illegally by selling contraband drugs may be laundered through highly cash intensive business such as laundromat or a restaurant where the illegal cash is mingled with business cash and thereby obfuscate the origin of money derived from criminal activity. In grammar the word “predicate” means the action which the “subject” did, does or proposes to do. In law, a “predicate offence” is a part or component of a larger crime or a more complex criminal activity often associated with money laundering or organized crime. The “predicate offence” serves as the underlying criminal act that generates proceeds or funds. “Financial terrorism”, “drug trafficking”, “arms trafficking”, “organized crimes”, “kidnapping”, “extortion”, “counterfeiting currency”, “counterfeiting and piracy of products”, “black marketing”, “illegal gambling” etc. are examples of “predicate offences”. Even though “tax evasion” is a prohibited offence, that by itself is not a “predicate offence”. But, it may become a “predicate offence” amounting to “money laundering” if the ill-gotten gains of tax evasion are utilized for investing in any lawful business or for the acquisition of any property and such ill-gotten gains are projected as untainted money. Thus, from the illicit act of tax evasion if the illegal proceeds generated from such tax evasion is eventually laundered (concealed by transferring to foreign banks or legitimate businesses) such “tax evasion” becomes a “predicate offence”. A question may arise as to whether a person who, out of his lawful “business-profit”, unknowingly gives a munificent donation to another businessman who utilizes the donation for “drug trafficking”, is indulging in money laundering. According to me, the answer is in the negative since the amount of donation is not “proceeds of crime” and the donor does not know that the donee will utilize the money for a “predicate offence”, unless it is shown that the donor is guilty of abetment of any of the “predicate offences”.

4. There is unfortunately a growing tendency on the part of officials of the Enforcement Directorate barging into most of the cases where a “scheduled offence” within the meaning of PMLA has been committed. Every instance of commission of a “scheduled offence” need not necessarily involve the commission of a “predicate offence”. There is a popular misconception that the offence of “money-laundering” is attracted the moment a “scheduled offence” has been committed. It is not so. Commission of any of the “scheduled offences” which fall under Parts A to C of the “Schedule” to the PMLA, by itself will not necessarily give rise to a “predicate offence” unless it generates “proceeds of crime” as defined in Section 2 (u) of the PMLA. To illustrate the position better, the offence of “murder” punishable under Section 302 IPC is one of the “scheduled offences” enumerated in paragraph 1 of Part A of the “Schedule” to PMLA. A person may be wreaking his vengeance against his arch enemy by committing murder of the latter. Such an offence by itself cannot ordinarily be a “predicate offence” since it does not generate any “proceeds of crime” to be laundered. Similarly, paragraph 8 of Part A of the “Schedule” to PMLA contains offences under the Prevention of Corruption Act, 1988. If a corrupt “public servant” may takes bribe and utilizes the bribe money for the treatment of his wife or son afflicted by cancer. Here he may be guilty of an offence punishable under the Prevention of Corruption Act, 1988. But, by no stretch of imagination could it be said that he has committed the offence of “money laundering” punishable under the PMLA. A person may do a thriving business in “share market” or in “lotteries” or “horse racing” by strictly conforming to the rules of business. Such a person's business which generates income cannot attract PMLA unless it is proved that his returns or profits have come out of “proceeds of crime” as defined in Section 2 (u) of PMLA or have been utilized for any criminal activity attracting the definition of “proceeds of crime”.

5. The purpose of this article is only to highlight the above aspect of the matter. I do not know whether the reported verdicts of Constitutional Courts including that of the Supreme Court of India have emphasized this aspect of the matter since many of those verdicts suffer from avoidable prolixity rendering it difficult to cull out the ratio decidendi therefrom.

6. This is my understanding of “money laundering” as envisaged by the PMLA. Anyone who feels otherwise is free to correct me with legal reasons in support of such correction, if any.

Author is Former Judge, High Court of Kerala. Views Are Personal